With group benefits regarding 125 plans, is it advisable to keep di separate and not pay with pre-tax dollars due to income taxation or is it common to 125 it and explain the taxation to the employer/employees?
Thank you,
Thank you,
Di on 125 or No?
- Thread starter Justin Bilyj
- Start date
- 1,896
Don't 125 it. While you may take the time to explain it and think that all is well, when a claim is filed/paid people will come after you with torches and pitchforks.
NO. At time of claim the employer would have to count it as income and go back and match taxes AKA a payroll nightmare. Also, the benefit amount is taxed for the policyholder and since it's already a reduced amount of their check they won't be too happy. If it's a bigger company w/ a savvy HR manager then the taxes saved may be worth the extra work but that would be their call.
vshafir
New Member
The rule is that you have to pay tax on income. So you either pay it upfront i.e. with after tax dollars, or in the end i.e. benefit amount is being taxed (if paid with pre-tax dollars)
Below you'll find a note from the claims department of one of major carriers. It specifically refers to who pays premiums, but same logic can be applied for section 125 plans:
From the claims department….
At claim time we verify who pays the premium, we don’t rely on the application since it could be incorrect or have changed.
So depending on what we find out at claim time, we would then either treat as taxable or not. If taxable, we send the following information to the Insured:
On the Disability Claim Notice you indicated that your employer pays XXX percent of the premium on your policy. Therefore, your monthly disability benefits are considered taxable. Because of this:
· In January of each year while you remain disabled you will receive a W-2 showing your taxable benefits. Depending on the arrangement with your employer the W-2 may come from your employer or may be issued by the Insurance Company.
· When any portion of the policy premiums are paid by the employer we are required by law to withhold FICA taxes from the claim benefits for any payment made before the last day of the month six months after your last date worked. We will notify your employer by mail each time that FICA taxes are withheld from claim benefits.
· We are also required to offer to withhold either Federal or State taxes from any disability benefits provided. If you wish us to deduct Federal and/or State taxes, please complete and return the information on the attachment to letter.
Below you'll find a note from the claims department of one of major carriers. It specifically refers to who pays premiums, but same logic can be applied for section 125 plans:
From the claims department….
At claim time we verify who pays the premium, we don’t rely on the application since it could be incorrect or have changed.
So depending on what we find out at claim time, we would then either treat as taxable or not. If taxable, we send the following information to the Insured:
On the Disability Claim Notice you indicated that your employer pays XXX percent of the premium on your policy. Therefore, your monthly disability benefits are considered taxable. Because of this:
· In January of each year while you remain disabled you will receive a W-2 showing your taxable benefits. Depending on the arrangement with your employer the W-2 may come from your employer or may be issued by the Insurance Company.
· When any portion of the policy premiums are paid by the employer we are required by law to withhold FICA taxes from the claim benefits for any payment made before the last day of the month six months after your last date worked. We will notify your employer by mail each time that FICA taxes are withheld from claim benefits.
· We are also required to offer to withhold either Federal or State taxes from any disability benefits provided. If you wish us to deduct Federal and/or State taxes, please complete and return the information on the attachment to letter.
- 166
Most of my cases allow employees to make the choice. The employer likes seeing the payroll tax savings associated with the pre tax election.
Expectations have to be managed correctly. The employer needs to understand their FICA obligation on claims, and employees can be given notices at time of application.
Most forget, but if you use an automated enrollment system you can keep an record trail to protect yourself.
Expectations have to be managed correctly. The employer needs to understand their FICA obligation on claims, and employees can be given notices at time of application.
Most forget, but if you use an automated enrollment system you can keep an record trail to protect yourself.
- 1,896
Why would you openly put yourself at risk for something like that? Unless there is a paper trail (that is well documented) and explains the ER obligations (and quite possibly to each EE who makes a pre-tax the deduction), you're setting yourself up for some potential blowback.
Unless it's a large group, the potential FICA savings are going to amount to a few bucks a week. Risk vs. reward is not on your side.
- 4,096
Good topic.
What about if the DI plan is 100% employer paid?
What about if the DI plan is 100% employer paid?
- Thread starter
- #9
What if its part of a qualified sick pay plan?
- 1,459
If it's 100% employer paid, claims will be taxable. Personally, I am not a fan of 100% employer paid. If an ER wants to pay it, I usually get them to do 95%. The reason: have you ever had an employer forget to add an employee to a plan?
I had an employer forget to add three employees for over two years. When the insurance company found out, they billed retroactively and the employer was pissed. It was around $3,000 and money was tighter at that point. He switched carriers and the prior carrier sent him to collections (which I told him would happen). This has happened on a smaller scale with other groups as well. Even if a small portion is contributory, that gets rid of the issue.
I had an employer forget to add three employees for over two years. When the insurance company found out, they billed retroactively and the employer was pissed. It was around $3,000 and money was tighter at that point. He switched carriers and the prior carrier sent him to collections (which I told him would happen). This has happened on a smaller scale with other groups as well. Even if a small portion is contributory, that gets rid of the issue.
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